For decades municipal bonds have been considered one of the safest income plays on the planet. If you’re unfamiliar with these investments, municipal bonds or muni bonds as they’re commonly called, are bonds issued by lower tier governments (state, city, or even county) to raise capital for public projects like building a highway, sewer, or what have you.

These bonds are not backed by the Federal government (with its printing presses). Because of this, muni bond interest payments (the yield) are usually tax-free (meaning no Federal or State income tax) in order to attract investors. They also typically yield much more than Treasuries (debt backed by the US Federal Government) due to the perceived increase in risk (again, there is no printing press behind these bonds, so there is no “guarantee” against default).

Historically, muni bonds have been an extremely safe source of income for investors. Between 1970 and 2000, the default rate for all muni bonds was only 0.04%. In contrast, the default rate on corporate bonds (bonds issued by corporations) was 9.8% during the same period.

Thus, historically muni bonds were considered an extremely safe means of securing a massive tax-free yield. Regrettably that “extremely safe” status is now being challenged by the massive deficit problems of state governments.

Muni bonds aren't safe anymore. State and local governments are have serious financial troubles.

Meredith Whitney continues to warn of likely defaults in the municipal bond sector. She said on CNBC that "hundreds of billions" in municipal defaults across the country are likely.

From what I am hearing from serious people, who get briefed on this at the highest levels, Whitney is dead on. She may be a bit early on her forecasts but the state and local muni debt tsunami is coming.

"There's not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults – more," Whitney added. "This will amount to hundreds of billions of dollars' worth of defaults."

Whitney became a household name in the investment community after issuing a dire report on Citigroup in 2007, prior to the global credit crisis. She predicted the bank would face a whopping credit crunch -- which it did -- and cut its dividend -- which it also did. The bank was subsequently forced to accept a massive government bailout.

Citigroup holds the most municipal bond debt out of all the banks in the US.

"Detroit is cutting police, lighting, road repairs and cleaning services affecting as much as 20% of the population," the Guardian's Elena Moya noted late Monday, writing about the 60 Minutes piece. "The city, which has been on the skids for almost two decades with the decline of the US auto industry, does not generate enough wealth to maintain services for its 900,000 inhabitants."

"The nearby state of Illinois has spent twice as much money as it has collected and is about six months behind on creditor payments," Moya added. "The University of Illinois alone is owed $400m, the CBS program said. The state has a 21% chances of default, more than any other, according to CMA Datavision, a derivatives information provider.

She continued: "California has raised state university tuition fees by 32%. Arizona has sold its state capitol and supreme court buildings to investors, and leases them back."

This really comes down to guys who aren't crunching the numbers. Meredith Whitney is crunching the numbers. She is very bearish. Others, who are in a position to know details the most of us are not privy to, tell me the situation is worse than most imagine. They tell me we may have a year or two before the problems develop, but that taxes won't do it. Indeed, they tell me there is no easy solution.

The only "solutions" I see are massive money printing by the Fed, which devalues the dollar domestically by more than 50% or a default on the pension obligations owed by the states. Neither option is the type that will sit easy with those concerned.

Bottom line: This is not the time to buy a muni bonds even to use as scrap paper. TOTALLY AVOID THE MUNI MARKET. All munis will get crushed once the panic starts. There may be some bargains in the panic, but that's way down the road.

What does this tell you? A mutual fund giant is getting out of the muni business.

How difficult is it going to get for municipalities to raise money? Very difficult.

Word is clearly leaking out that there are serious problems in the bond market and investors are starting to avoid the sector.

The mutual fund giant, Vanguard Group, just announced they are not going forward with the launch of three planned muni bond funds. Investor demand is just not there.

"We believe that this delay is prudent given the high level of volatility in the municipal bond market," said Rebecca Katz, spokeswoman for Vanguard.

In another indication of the developing problem, the New Jersey Economic Development Authority, a governmental agency, had to cut back a planned refinancing by 40%, to $1.1 billion from $1.8 billion due to weak demand.

In 1800, the United States Treasury owed $83 million. The population was then three million. Every baby born that year was loaded down with a debt burden of about $28; if the interest rate was 6 percent, the newborn citizen could look forward to paying a service charge on the national debt of $1.68 per year. Today the debt load of the nation comes to well over $290 billion, and the population is, in round figures, 180 million. Thus, while the population has increased by 60 times, the national debt has increased by 3,600 times; and figuring the interest rate at 4 percent, the cost of handling this debt is, roughly, $68 per citizen per year. The child is now loaded down at birth with a debt load of $1,700. These figures might be adjusted to the increased production per citizen, and to the decreased value of the dollar. Even so, the fact sticks out that posterity does not pay off anything of the national debt, that each administration adds to the debt left to it, and that the promise of liquidation implied in every bond issue is a false promise.

The bulk of the rise in the national debt has occurred since 1933, when Franklin D. Roosevelt abolished the gold standard and thus made money redeemable in — money. When money was redeemable in gold, the inherent profligacy of government was somewhat restrained; for, if the citizen lost faith in his money, or his bond, he could demand gold in exchange, and since the government did not have enough gold on hand to meet the demand, it had to curtail its spending proclivity accordingly. But, Mr. Roosevelt removed this shackle and thus opened the floodgates. The only limit to the inclination of every politician to spend money, in order to acquire power, is the refusal of the public to lend its money to the government. Of course, the government can then resort to printing money, to make money out of nothing, but at least the people will not be compounding the swindle. Therefore, I offer the following gratuitous advice: